Dollar's drop spurs oil's surge

NEW YORK — The surging price of oil reached another milestone Monday, jumping to an inflation-adjusted record high of $103.95.

The weaker dollar, which has propelled oil and other commodities prices higher, sent light, sweet crude for April delivery past $103.76 a barrel on the New York Mercantile Exchange. That's the level many analysts consider to be the true record high for oil, after its $38 barrel price from 1980 is translated into 2008 dollars.

Futures later retreated from that high to settle up 61 cents at $102.45 after Royal Dutch Shell PLC said it would resume oil shipments from Nigeria that had been disrupted by rebel attacks.

Oil's most recent run into record territory has been driven by the greenback's slump against other world currencies. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

Gold, copper and wheat are among the commodities that have rallied as the dollar has fallen.

"It's coming down to another commodity price rally," said Phil Flynn, an analyst at Alaron Trading Corp., in Chicago.

The dollar has been weighed down by concerns about the U.S. economy and the Federal Reserve's interest rate cutting campaign. Lower interest rates tend to weaken the dollar, which fell Monday to a new low of $1.5275 against the euro.

The struggling dollar has prompted a wave of speculative buying by oil investors seeking a haven from the ongoing volatility of the stock market. Such speculation can become self-perpetuating, driving prices higher and attracting even more speculators.

Many analysts believe oil prices aren't justified by crude's underlying supply and demand fundamentals, and are due to fall at some point. While supply disruptions in Nigeria and the prospect of supply cutoffs from Iraq and Venezuela helped boost oil prices last year, domestic oil inventories are now rising even as a number of forecasters are cutting their demand growth predictions due to the slowing economy.

Investors are keeping an eye on OPEC, which meets Wednesday to consider production levels. Most expect the Organization of Petroleum Exporting Countries to hold output steady.

As for where oil goes from here, analyst estimates vary widely, with some predicting an eventual decline to the $65 or $70 range as supplies continue to grow and demand falls, and others seeing oil rising as high as $120 as investment capital continues to flow into oil markets from overseas.

For its part, the Energy Department's Energy Information Administration's latest prediction is that oil will average $86 a barrel in 2008, up 19 percent from 2007.

Commodity crush

Oil isn't the only commodity setting records or flirting with record territory lately. Here are a few other examples:

Gold: Gold rose to a record $992 an ounce Monday, before retreating to close at $981.60 on the New York Mercantile Exchange. Gold has rallied 36 percent since mid September, when the first of five cuts to the U.S. benchmark interest rate sent the dollar to a record low against the euro.

Silver: Silver futures for May delivery gained 26.5 cents, or 1.3 percent, to $20.18 an ounce. The price earlier reached $20.74, the highest since October 1980. Silver has jumped 35 percent this year after climbing 15 percent in 2007.

Wheat: Wheat futures for May delivery rose 16.5 cents, or 1.5 percent, to $11.025 a bushel Monday on the Chicago Board of Trade. On Feb. 27, wheat reached $13.495 a bushel, the highest ever. The price has more than doubled in the past year on speculation farmers won't produce enough to meet global demand.

Coffee: The price of green coffee beans has risen 22 percent since the beginning of the year in trading on Intercontinental Exchange Futures U.S. after rising 7.7 percent last year.

Sawdust: The price of sawdust has soared from about $25 a ton in 2006 to more than $100 in some markets. Blame the housing slump: Fewer new homes mean fewer trees cut for use in construction, which leads to less sawdust and other wood waste, driving up the price.